VW takes aim at China to fix budget car Achilles heel

Reuters

If Volkswagen (VW) is to achieve its goal of becoming the world’s biggest automaker, it needs to conquer the only market where the German group trails major competitors: low-cost cars.

Europe’s biggest carmaker plans to launch a budget brand in China with one of its local partners by about 2015, aiming to draw on more than 2,000 dealers and a market share of more than 20 percent to take on similar no-frills ventures established by General Motors, Nissan and Honda. The brand, likely to be a major talking point at the Shanghai auto show, may include a van, estate and small sedan priced between US$7,800 and US$9,1000, company sources have said. If successful, it could be replicated elsewhere.

However, expanding into budget cars is not without its risks for a group that makes more than half its 11.5 billion euros (US$15.1 billion) operating profit from luxury marques like Audi and Porsche. And competitors are not standing still.

“It’s difficult for any carmaker to unlearn many decades of engineering,” said Deepesh Rathore, managing director of research firm IHS Automotive in India, referring to VW’s traditional focus on technologically advanced vehicles.

In the face of plunging European car sales, VW has continued to prosper thanks to strong demand for its upmarket models in emerging markets, and it is determined to snatch the global sales crown from Toyota in the next five years.

However, a group that makes everything from motorcycles and supercars to 40 tonne trucks increasingly feels that to do this — and then stay ahead — it will have to address the boom in demand for no-frills cars, particularly in developing economies.

The opportunity looks huge. Global sales of cars priced up to US$11,000 are forecast to surge 39 percent to 33.1 million cars by 2020, accounting for about a third of the world market, from 23.9 million last year, IHS Automotive said.

At the same time, the two largest markets for budget vehicles, China and India, are expected to see sales in the segment increase 44 percent and more than 100 percent to 7.02 million and 5.03 million respectively, IHS data show.